Dishonour of Negotiable Instruments: Reasons, Consequences, and Legal Recourse

Theoretical overview

Dishonour of negotiable instrument:  Dishonour of a negotiable instrument means loss of honour or respect for the instrument which is in question on the part of the maker, payer or acceptor, as the case may be, which ultimately does not result in realization of the payment due on the instrument. This may be by non-acceptance, when a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained.

Cases of Dishonour of negotiable instrument:

• When the maker, drawer or acceptor actively does something so as to intentionally obstruct the presentment of the instrument, e.g., deprives the holder of the instrument and keeps it after maturity.
• When his business place is closed on the due date.
• In a situation, when there is no person present to make payment at the specified place for payment.
• When we cannot find the person even after due searching.
• In the case of a promise to pay notwithstanding non-presentment.
• When the party entitled to presentment waives the presentment in an express or implied manner.
• When there would have been no damage to the drawer in the case of non-presentment.
• If the drawer is incompetent to contract.
• In a case where the drawer and the drawee is the same person.
• In the case of the situation that renders the presentment impossible for e.g. the declaration of war between the countries of the holder and the drawee.
• When there is a non-acceptance on some other grounds, even though the presentment has been irregular.

A negotiable instrument can be dishonoured by: –

1. Non acceptance
2. Non-payment

A bill of exchange is dishonoured either by non-acceptance or non-payment, but a cheque and promissory note can be dishonoured by non-payment.

1. Dishonour by non-acceptance [Section 91]:Dishonour means failure to honour a negotiable instrument. This may be by non-acceptance, when a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained. A negotiable tool is made-up to be violated any by non-acceptance or non-payment.

It is said in the following cases that when a bill of exchange becomes dishonoured by non-acceptance: –

• If the drawee or one of several drawees, who are not a partner failed to accept the bill within 48 hours, then the bill becomes dishonoured.
• When the drawee is a fictitious person and cannot be traced (Section 61)
• When the payer is not competent to enter into the contract.
• When the payer accepts with qualified acceptance (Qualifies acceptance means when holder gives consent to an offer that is either conditional or partial and changes the offer by changing the time, amount, mode or place of payment which he is not allowed to do).
• When the drawee is insolvent or deceased.
• When the submission for acceptance is waived and the bill is not accepted, that is, it remains unacceptable.

2. Dishonour for non-payment [Section 92]: A promissory note, bill of exchange, or   cheque is said to be dishonoured for non-payment when the maker of the note, the acceptor of the bill, or the payer of the cheque defaults on payment when it is duly required to make payment.

It is said in the following cases that when a bill of exchange becomes dishonoured by non-payment: –

• When a bill is accepted, it has to be presented on its maturity date.
• When the acceptor fails to make payment when due, the bill is dishonoured for non-payment.
• When the holder of a bill or pro-note may consider it dishonoured without placing it for payment, when the presentation for payment is expressly waived by the maker of the pro-note, or the acceptor of the bill, and the note is overdue or the bill is not paid.
• When the banker refuses to pay, the cheque is dishonoured for non-payment.

Dishonour of cheque for insufficient funds in the account: A cheque drawn by a person on an account maintained by him with the bank for payment of any sum to another person may be returned without payment for shortfall of sufficient funds in the said account. This is called dishonour of cheque for lack of funds (in the account of the drawee). This is called dishonour of cheque for lack of funds (in the account of the drawee). In such cases, the drawer is also criminally liable for the offense and shall be punished with imprisonment of either description for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both.

Effect of dishonour of negotiable instrument [Section 93]: –

• When a negotiable instrument is disallowed by either non-acceptance or non-payment, the holder has all the rights to sue the parties liable to pay.
• It is mandatory for holder to every party against whom he wishes to proceed.
• Notice must be given to the holder of the instrument.
• Notice is given to all parties, it may be given to the endorser (a person authorized to sign a negotiable security).
• The notice may be oral or in writing (to be sent by post).
• The notice should be given in due course.
• Except in cases in which the notice with section 98 has been discharged all parties entitled to such notice have to be set free.

Relevant sections

1.  Section 91: Dishonour by non-acceptance
2. Section 92: Dishonour for non-payment
3. Section 93: Effect of dishonour of negotiable instrument 

Points to remember

1. Dishonour of a negotiable instrument means loss of honour or respect for the instrument which is in question on the part of the maker, payer or acceptor, as the case may be, which ultimately does not result in realization of the payment due on the instrument. This may be by non-acceptance, when a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained.
2. This may be by non-acceptance, when a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained. A negotiable tool is made-up to be violated any by non-acceptance or non-payment
3. A promissory note, bill of exchange, or   cheque is said to be dishonoured for non-payment when the maker of the note, the acceptor of the bill, or the payer of the cheque defaults on payment when it is duly required to make payment.
4. A cheque drawn by a person on an account maintained by him with the bank for payment of any sum to another person may be returned without payment for shortfall of sufficient funds in the said account. This is called dishonour of cheque for lack of funds